Monitor and Control Accounts Receivables (By: Gezahegn G.

Department of Accounting/TVET/2009 Entries

Competency: Monitor and Control Accounts Receivables

Competence Title: Monitoring and Controlling Accounts Receivables

By: Gezahegn G.

ACCOUNTING FOR RECEIVABLES

Key Terms and Concepts to Know

 Accounts Receivable:
 Result from sales on account (credit sales), not cash sales.

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

 May also result from credit card sales if there is a delay between when sale is
made and when the cash is received from the credit card company.
 Accounting for Uncollectible Accounts:
 Not all sales on account result in cash being collected from the customer.
 Account receivable that are not collected result in an operating expense.
 The matching principle requires that this expense be recorded in the period of
sale, not the period when the account is determined to be uncollectible.
 Receivable amounts due that are never collected. Also called uncollectible accounts

Determining the Amount of Uncollectible Receivables and Bad Debt Expense

A. The Percent of Sales Method

 Uses credit sales for the period to estimate bad debt expense for the period.
 Sometimes referred to as the income statement method.
B. The Percent of Receivables Method
 Analyses the balance in Accounts Receivable to estimate the balance in the
Allowance for Uncollectible Accounts at the end of the period.
 Sometimes referred to as the balance sheet method.
 Accounts Receivable on the Balance Sheet:
 Allowance account is deducted from Accounts Receivable to determine Net
Realizable Value.
 Notes Receivable:
 Notes Receivable may be accepted by the seller in payment for a sale or to
replace an account receivable from a prior sale.
 An asset representing the right to receive the principal amount contained in a written
promissory note. Principal that is to be received within one year of the balance sheet
date is reported as a current asset. Any portion of the notes receivable that is not due
within one year of the balance sheet date is reported as a long term asset.
 A note receivable is a written promise to receive a specific amount of cash from
another party on one or more future dates. This is treated as an asset by the holder of
the note. Overdue accounts receivable are sometimes converted into notes
receivable, thereby giving the debtor more time to pay, while also sometimes
including a personal guarantee by the owner of the debtor.
 Written promises to receive stated sums of money at future dates, classified as
current (if due within 12 months) or non-current (if due after 12 months) of the
balance sheet date.
 Notes bear interest for their term which is paid at the end of the term, the maturity
date.
 Interest rates are typically stated as a percent per annum, that is, as a yearly or
annual rate. Interest revenue is earned as time passes, regardless of whether payment
has been received.
 Interest revenue for outstanding notes receivable is typically accrued at the end of
the year, although it may be accrued at the end of a quarter or month.

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

 If the note is not paid or dishonored at maturity, the amount of the principal and
interest is debited to accounts receivable because it is still payable to the seller by
the buyer. Another note may also be accepted by the buyer in place of the account
receivable.

Accounts Receivable Turnover Ratio

Key Topics to Know

Allowance Method
The Allowance Method takes its name from the Allowance for Uncollectible Account which is used to
properly value accounts receivable until the uncollectible account receivable can be written-off.
Allowance method is the method of accounting for uncollectible accounts that estimates these amounts
and uses an allowance account so that the balance sheet shows the amount of accounts receivable
expected to be collected in the future.

Write Off

Definition: A write off is a reduction in the recorded amount of an asset. A write off occurs upon the
realization that an asset no longer can be converted into cash, can provide no further use to a business, or
has no market value. In general, a write off is accomplished by shifting some or all of the balance in an
asset account to an expense account.

The Allowance Method debits bad debt expense in the period when the sale is recorded and credits a
contra-asset account, Allowance for Uncollectible Accounts.

Uncollectible Accounts Expense xxx

Allowance for Uncollectible Accounts xxx

In the period in which a specific account is determined to be uncollectible, the Allowance is debited and
Accounts Receivable is credited.

Allowance for Uncollectible Accounts xxx

Accounts Receivable xxx

Uncollectible Accounts Expense is reported on the Income Statement. The Allowance for Uncollectible
(Doubtful) Accounts is a contra asset account and is reported on the Balance Sheet as a deduction from
Accounts Receivable. The result is called Net Realizable Value:

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Current Assets:
Accounts Receivable 25,000
less allowance for doubtful accounts 3,000
Net Realizable Value 22,000
Sometimes a customer will pay the accounts receivable after it was written off.
Recording the receipt of cash is always a two-step process: first, the account receivable is reinstated
(added back into the general ledger) and second, the cash is recorded and accounts receivable is reduced
for the payment.

To reinstate the accounts receivable:

Accounts Receivable xxx

Allowance for Uncollectible xxx

To apply the cash received:

Cash xxx
Accounts Receivable xxx

Example #1: Journalize the following transactions.

2011 12/31 Estimated that $7,000 of accounts receivable would
become uncollectible.
2012 1/05 Wrote-off the $800 balance owed by Jane Camp and the
$500 balance owed by Friends, Inc.
3/18 Reinstated the account of Jane Camp that had been written off as Uncollectible
Solution #1

Uncollectible Accounts Expense 7,000

Allowance for Uncollectible Accounts 7,000

Allowance for Uncollectible Accounts 1,300

Accounts Receivable-Camp 800
Accounts Receivable-Friends 500

Accounts Receivable-Camp 800

Allowance for Uncollectible Accounts 800

Cash 800
Accounts Receivable-Camp 800

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Methods for Estimating the Uncollectible Amount

In the period of sale, the customer that eventually will not pay, the amount that will not be paid and the
period in which the customer’s account will become uncollectible cannot be determined. Therefore, the
uncollectible accounts expense must be estimated at the end of each accounting period.

Percentage of Sales Method

The Percent of Sales Method uses one income statement account, Sales, to estimate the change in another
income statement account, Bad Debt Expense, for the period. This is the amount of the required adjusting
entry. This method is typically used by businesses with a large number of customers with relatively
uniform accounts receivable balances. The balance in the Allowance account is the
balance in the ledger before adjustment plus the adjusting entry for bad debt expense.
The bad debt expense for the period is calculated by multiplying the uncollectible percentage times the
credit sales in the period to determine the uncollectible accounts expense for the period. This will be the
amount of the adjusting entry.

Example #2: Uncollectible accounts expense is estimated at ¼ of 1% of net sales of $4,000,000 for the
year. The current balance in Allowance for Doubtful Accounts is $300 credit. Determine the following:
a) The uncollectible accounts expense for the year.
b) The adjusting entry to be made on December 31.
c) The balance in Allowance for Doubtful Accounts after adjustment.
Solution #2
a. Uncollectible accounts expense = 4,000,000 * .0025 = $10,000
b.
Uncollectible Accounts Expense 10,000
Allowance for Uncollectible 10,000

c. $300 credit balance + 10,000 additional credit = $10,300 credit balance

Percent of Accounts Receivable Method

The Percent of Receivables Method uses the balance in one balance sheet account, Accounts Receivable,
to estimate the balance in another balance sheet account, Allowance for Uncollectible Accounts, at the
end of the period.
The adjusting entry for bad debt expense is the difference between the balance in the ledger for the
allowance account before adjustment and the estimated balance in the allowance account.

The current balance of accounts receivable is analyzed by use of an aging schedule to determine the
desired ending balance for the Allowance for Doubtful Accounts. The uncollectible accounts expense for
the period is determined based on the current (unadjusted) balance in the Allowance, the desired ending
balance in the Allowance account and any write-offs of uncollectible accounts during the period.

Bad debt expense = ending balance + write-offs – beginning balance

However, if there have been more write-offs than expected, the balance before adjustment in the
allowance account may be a debit:

Bad debt expense = ending balance + write-offs+ beginning balance

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Example #3: The balance of Allowance for Doubtful Accounts before adjustment at the end of the period
is $400 debit. Based on an analysis of Accounts Receivable, it was estimated that $9,000 would become
uncollectible.
Determine the following:
a) The uncollectible accounts expense for the year.
b) The adjusting entry to be made of December 31.
c) The balance in Allowance for Doubtful Accounts after adjustment.

Solution #3
a) Allowance for Doubtful Accounts
Balance 400
Uncollectible accounts
Accounts receivable
expense =?
written-off = 0
9,000 ending balance

Uncollectible accounts expense = 400 + 9,000 -0 = 9,400

b) Uncollectible accounts expense 9,400

Allowance for doubtful accounts 9,400

c) 9,000

Practice Problem #1: Journalize the following transactions assuming the allowance method is used to
account for uncollectible receivables.
05/14 Received 75% of the $20,000 balance owed by Webb Co., a
bankrupt business. Wrote off remainder as uncollectible.
06/20 Reinstated the account of Zorn Co., which had been written off
in the preceding year as uncollectible. Received $5,225 cash as
full payment of Zorn’s account.
07/27 Wrote off the $2,500 balance owed by Schmich, Inc. which had
no assets.
12/31 Based on an analysis of Accounts Receivable, it is determined that
$11,500 will become uncollectible. The balance in Allowance for Doubtful Accounts on
December 31 prior to adjustment is $200 credit.
Determine the following:
a) The balance in Allowance for Doubtful Accounts after adjustment.
b) The Net Realizable Value of Accounts Receivable if the balance of Accounts
Receivable is $62,000.
c) Redo the entry for 12/31and questions a) and b) if the percent of sales
method had been used to estimate uncollectible accounts expense at the rate
of ½ of 1% of net sales of $2,000,000.

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

DIRECT WRITE-OFF METHOD

The Direct Write-off Method records uncollectible accounts expense in the period when the customer’s
account is determined to be uncollectible. The entry to write-off the account receivable is

Uncollectible accounts expense xxx

Accounts receivable xxx

NOTES RECEIVABLE
A Promissory Note is a written promise to pay a specific dollar amount on demand or at a specific time,
usually with interest. If the note is paid according to the terms, the note is honored. If the note is not paid
as agreed according to the terms, the note is dishonored. If the note is dishonored, the amount due
including the interest earned and unpaid is recorded in accounts receivable.
At the end of the accounting period, in order to comply with the matching principle, interest must be
accrued for the number of days between the most recent interest payment date and the end of the
accounting period using the calculation method shown above.
Example #4: On July 17, 2001, received a $12,000, 90-day, 10% note on account
from Adams Co.
Determine:
a) Due date for the note
b) Interest earned during the term of the note
c) Maturity value of the note
Prepare journal entries whether:
d) The note is honored on the maturity date
e) The note is dishonored on the maturity date

Solution #4:
a) Due Date:
Term of the note = 90
Days remaining in July 31 – 17 = 14
Remaining term of the note 76
Days in August 31
Remaining term of the note 45
Days in September 30
Remaining term of the note 15

Since the remaining 15 days are less than the 31 days in October,
the note is due on October 15.

b) Interest calculated as
Principal X Rate X Time = $12,000 x .10 x 90 days/360 days = $300
Time is calculated as the term of the note divided by 360 days for the year.
Time is always based on a 360-day year.

c) Maturity Value Calculated as

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Principal + Interest $12,000 + $300 = $12,300

d) Note is honored:
7/17 Notes receivable 12,000

Accounts receivable 12,000

10/15 Cash 12,300

Notes receivable 12,000

Interest receivable 300

e) Note is dishonored:
7/17 Notes receivable 12,000
Accounts receivable 12,000

10/15 Accounts receivable 12,300

Notes receivable 12,000
Interest receivable 300
The difference between the two entries for 10/15 is the account to be debited.

Example #5: Journalize the adjusting entry for accrued interest on December 31
for the following outstanding notes receivable. Journalize the receipt of the amount due on the due date
for each note.
a) $24,000, 60-day, 10% note dated December 1.
b) $12,000, 90-day, 15% note dated October 22.
Solution #5:
a) Interest has been earned for 30 days
Days remaining in December 31 – December 1 =30 days
Interest earned = $24,000 x .10 x 30 days /360 days = $200

Interest receivable 200

Interest revenue 200
Cash 24,400
Notes receivable 24,000
Interest revenue for January 200
Interest receivable 200
b) Interest has been earned for 30 days

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Days remaining in October 31 – October 22 = 9 days

Days in November = 30 days
Days in December = 31 days
Total days to accrue/increase 70 days

Interest earned = $12,000 x .15 x 70 days /360 days = $350

Interest receivable 350

Interest revenue 350

Cash 12,450
Notes receivable 12,000
Interest revenue for Januar1 100
Interest receivable 350

Practice Problem #2: Journalize the following transactions

a) 9/12 Received a $30,000, 12%, 120-day note on account.
b) 10/9 Received a $15,000, 10%, 60-day note on account.
c) 11/15 Received an $18,000, 15%, 30-day note on account.
d) 12/8 Received the amount due on the note of October 9.
e) 12/15 The note of November 15 was dishonored.
f) 12/31 Accrued interest on the note of September 12.

Practice Problem #3:

At the end of the year, two similar companies were in the process of calculating bad debt expense for the
year. Each company had credit sales of $1,000,000 and a debit balance in Allowance for Uncollectible
Accounts of $2,000 before any year-end adjustment. The balance of Accounts Receivable is $180,000.
Company A estimates that 5% of accounts receivable will not be collected over the next year Determine
the following:
a) The uncollectible accounts expense for the year.
b) The adjusting entry to be made of December 31.
c) The balance in Allowance for Doubtful Accounts after adjustment.
Company B estimates that 5% of credit sales will not be collected over the next year
Determine the following:
d) The uncollectible accounts expense for the year.
e) The adjusting entry to be made of December 31.
f) The balance in Allowance for Doubtful Accounts after adjustment.

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

Solutions to Practice Problems

Practice Problem #1

05/14 Cash 15,000

Allowance for Doubtful Accts 5,000
Accounts Receivable-Webb 20,000

06/20 Accounts Receivable 5,225

Allowance for Doubtful Accts 5,225
Cash 5,225
Accounts Receivable 5,225

07/27 Allowance for Doubtful Accts 2,500

Accounts Receivable 2,500

12/31 Uncollectible Accounts Expense 11,300

Allowance for Doubtful Accts 11,300 (11,500 – 200 credit balance= 11,300)

a) 11,500
(based on analysis of A/R)

b) Accounts receivable $62,000

Less: Allowance for doubtful accounts 11,500
Net Realizable Value $50,500

12/31 Uncollectible Accounts Expense 10,000

Allowance for Doubtful Accts 10,000 (2,000,000 x .01 x .5 = 10,000)

a) 10,200 = 10,000 + 200 credit balance

b) Accounts receivable $62,000

Less: Allowance for doubtful accounts 10,200
Net Realizable Value $51,800

Practice Problem #2
a)
Notes Receivable 30,000
Accounts Receivable 30,000

b)
Notes Receivable 15,000
Accounts Receivable 15,000

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 Monitor and Control Accounts Receivables (By: Gezahegn G.)

c)
Notes Receivable 18,000
Accounts Receivable 18,000

d)
Cash 15,250
Notes Receivable 15,000
Interest Revenue 250
(15,000 * .10 * 60/360 = $250 interest)

e) 12/15
Accounts Receivable 18,225
Notes Receivable 18,000
Interest Revenue 225
(18,000 * .15 * 30/360 = $225 interest)

f) 12/31 Interest Receivable 1,100

Interest Revenue 1,100

Sept 12 – Dec 31 = 110 days30,000 * .12 * 110/360 = $1,100 interest

Practice Problem #3
a) Allowance for Doubtful Accounts
Balance 2,000
Uncollectible accounts
Accounts receivable
expense = ?
written-off =8,000
9,000 ending balance

Uncollectible accounts expense = 9,000 + 8,000 + 2,000 = 19,000

b) Uncollectible accounts expense 19,000

Allowance for doubtful accounts 19,000
c) 9,000
d) Allowance for Doubtful Accounts
Balance 2,000 Uncollectible accounts
Accounts receivable expense = 50,000
written-off =8,000 1,000,000 x .05
40,000 ending balance

Allowance of Doubtful Accounts balance = -2,000 + 50,000 – 8,000 = 40,000

e) Uncollectible accounts expense 50,000

Allowance for doubtful accounts 50,000
f) 40,000

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